Saving for school is difficult, especially with rising college tuition costs. If you’ve diligently set aside money in a 529 college savings plan to cover costs, it’s especially frustrating when the investments go down in value.
When tuition is due and your investments in the tax-advantaged plan haven’t paid off as much as you anticipated, you have a tough decision to make: Do you take money out of your account and lock in losses or find another way to pay for school?
Unfortunately, there’s no single right answer to this question. “Like many questions when dealing with finances, the answer here is ‘it depends,'” said Mackenzie Richards, a certified financial planner and senior financial consultant with BankRI Investment Services. “Between expected financial aid, grants, accumulated savings, tuition costs, and time until graduation, there are many variables that could change the answer here depending on someone’s specific situation.”
To help you decide your best course of action, here’s some advice from three financial experts.
Figure out how far your money will go
Knowing how far the balance in your investment account will go is one of the biggest factors to consider before making your next move.
“Most people are not saving enough to cover the full four years of tuition,” Richards said. If this is your situation and you’ll be taking out loans at some point anyway, you might want to leave the money invested for a while until your investments recover and take out loans in the interim, he suggested.
Students who decide to borrow should exhaust federal loan options before considering private student loans because federal student loans offer more borrow protections, including income-driven repayment plans. The federal loan options include:
- Direct Subsidized Loans: These loans offer affordable, fixed interest rates. The interest is subsidized by the government while students are in school or loans are deferred.
- Direct Unsubsidized Loans: These loans also offer affordable, fixed interest rates, but the interest is not subsidized. It can be added to the loan balance if it’s not paid while you’re in school or while loans are deferred.
The funds from loans can be used to cover tuition for a year or two while your investment account recovers. The invested funds then can be used to pay for the final years of undergraduate school or even for grad school.
If you decide to leave your money invested, it’s important to assess what went wrong and make any necessary changes to your portfolio so that you don’t incur further losses. “Evaluate what happened to the investments,” said Chris Cooper, a CFP and adviser at Chris Cooper & Co., to check if you were over-concentrated in a few stocks or high-fee assets, or if you were too aggressively invested.
Try to correct the problem, getting help from a financial adviser if necessary.
Consider the type of investment account you have
The type of account your money is invested in also dictates what you should do if your investments tank.
If you’ve invested in a tax-advantaged 529 plan, there are restrictions on how the plan’s funds can be used. The money can go only toward paying qualifying educational expenses such as tuition.
People who save in taxable accounts can leave their money invested, take out loans to cover education costs, and then pay back the loans in the future once their investments recover, but this option typically isn’t available with a 529 plan. The money in a 529 account can’t be used to pay off loans when the investment recovers because loans aren’t considered a qualifying educational expense.
Since you can’t use money in a 529 account for anything other than qualifying educational expenses, it might be better to accept the investment losses and pay for school if there’s enough in the account to cover tuition and fees.
Choose the right investments
It’s important to choose an appropriate investment strategy to help reduce the likelihood that your college investment account may tank when you need the funds to pay for school.
“Make sure you’re proactively assessing how much exposure to stocks the account has,” Richard warned. “Since stocks are generally riskier than other investment options, you should reduce your exposure [to stocks] as you get closer to when that tuition bill is due.”
The 529 college plans allow you to change twice a year how your money is invested. Many plans make investing easier by allowing you to buy into specialized funds called target-date funds, which include a mix of investments with an appropriate level of risk based on when you’ll need the money. Make sure you choose investments targeted toward people who need the money to cover tuition costs very soon if you need to withdraw funds for school within the next year or two.
You also should avoid putting all your eggs in one basket. “To make sure you have sufficient funds available, diversify your portfolio so that should a certain stock, industry, or investment vehicle take a hit, there are other investments that are doing well and can be used while waiting for the recovery of the ones that are currently taking loses,” advised Ryan R. Boggs, an investment adviser representative with FourStar Wealth Advisors LLC.
If you’re leaving your money invested in your 529 plan, it’s not too late to make changes to reduce the chance of losses and allow your account to recover so that you can use it to pay your tuition in later years.
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College Ave Student Loans products are made available through either Firstrust Bank, member FDIC or M.Y. Safra Bank, FSB, member FDIC. All loans are subject to individual approval and adherence to underwriting guidelines. Program restrictions, other terms, and conditions apply.
Information advertised valid as of 4/1/2019. Variable interest rates may increase after consummation.
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Before applying for a private student loan, SunTrust recommends comparing all financial aid alternatives including grants, scholarships, and both federal and private student loans. To view and compare the available features of SunTrust private student loans, visit https://www.suntrust.com/loans/student-loans/private.
Certain restrictions and limitations may apply. SunTrust Bank reserves the right to change or discontinue this loan program without notice. Availability of all loan programs is subject to approval under the SunTrust credit policy and other criteria and may not be available in certain jurisdictions.
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A government loan is made according to rules set by the U.S. Department of Education. Government loans have fixed interest rates, meaning that the interest rate on a government loan will never go up or down.
Government loans also permit borrowers in financial trouble to use certain options, such as income-based repayment, which may help some borrowers. Depending on the type of loan that you have, the government may discharge your loan if you die or become permanently disabled.
Depending on what type of government loan that you have, you may be eligible for loan forgiveness in exchange for performing certain types of public service. If you are an active-duty service member and you obtained your government loan before you were called to active duty, you are entitled to interest rate and repayment benefits for your loan.
A private student loan is not a government loan and is not regulated by the Department of Education. A private student loan is instead regulated like other consumer loans under both state and federal law and by the terms of the promissory note with your lender.
If your private student loan has a fixed interest rate, then that rate will never go up or down. If your private student loan has a variable interest rate, then that rate will vary depending on an index rate disclosed in your application. If the interest rate on the new private student loan is less than the interest rate on your government loans, your payments will be less if you refinance.
If you don’t pay a private student loan as agreed, the lender can refer your loan to a collection agency or sue you for the unpaid amount.
Remember also that like government loans, most private loans cannot be discharged if you file bankruptcy unless you can demonstrate that repayment of the loan would cause you an undue hardship. In most bankruptcy courts, proving undue hardship is very difficult for most borrowers.
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|4.50% – 11.35%*,3||Undergraduate and Graduate|
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|3.74% – 9.72%7||Undergraduate, Graduate, and Parents|
|4.45% – 12.32%8||Undergraduate, Graduate, and Parents|